A tale of two squeezes

By | Published: April 2, 2011

The media and politicians concentrate on the coming squeeze on the public sector. It is struggling to live within an extra £485 billion overdraft to tide it over the next five years, and to live with an increase of just £93 billion a year by Year 5 for current spending.

Meanwhile, the squeeze which everyone else feels is the squeeze on incomes from inflation, low wage increases, and higher taxes. According to the Office of Budget Responsibility, earnings will go up by 2.9% less than prices in 2010-11, 3.4% less than prices in 2011-12, and by 0.1% less than prices in 2012-13. In other words, the OBR forecasts a 7% reduction in average living standards as prices rise faster than incomes.

Increasing tax takes do not help either.

There needs to a balance between the squeeze on the public and the squeeze on the private sectors. The current strategy of large increases in tax revenue and continuing increases in public spending and borrowing are squeezing the private sector considerably.

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Give some specific examples of these huge numbers of things being done, much of which is negative, that could be done at half the cost and how these savings would be used to help the private sector other than the obvious tax cuts that should in reality be used to improve the infrastructure. Far better run countries often have higher tax rates and better infrastructure. Germany being a prime example.

If one listens to the man in the pub, one hears a fair amount of resentment on the part of those working in the private sector when seeing the conditions afforded to those in the public sector. There is a feeling that the balance is simply not fair.

Pace yesterday’s post also, this illustrates an unbalanced view of the county in much of the public debate which is so ‘cuts’ focused.

I along with many readers of this site have on numerous occassions made comment, that the Government is just simply not getting its message across in any sensible way, with regard to the argument about cuts in the public sector and the fact that spending is actually rising.

This abject failure to communicate, and dare I say it, defend its position and its argument on cuts, seems almost suicidal in political terms if it continues for much longer.

Are you aware of any governent policy to deliberately keep silent on the whole cuts subject, are Ministers being gagged on talking about actual spending increases (because it will spoil the illusion of cuts being made).

Are they (the Government) aware that their non response to all this media attack, is in effect surrendering the argument, and will/has brainwashed the public into really thinking, that real cash cuts are happening in ever larger and larger percentages right across the board.

The vast majority of people believe that cuts have to be made to government spending, so is this the reason why the Government do not want to let the cat out of the bag about its cuts policy, has actually resulted in increases ?.

Sorry if this argument goes around in circles, but I simply cannot understand the logic of the present government postion in keeping silent, and taking punishment for no real reason on cuts, when if any flack is due, it should be on its failure to do enough to stop spending increases.

Reply: I also find it difficult to understand. I think many Ministers accept the cuts rhetoric and have not understood the numbers.

It has been a concern of mine for many years, that many MP’s of all parties do not really understand finance, as that would explain some of the crass taxation, benefits, regulation and spending policies of many decades, it would also to a degree explain the voting numbers that troop through the lobbies with regard to Europe.

I can only hope Government Ministers do understand the figures, because if they do not get it, then we have absolutely no hope of success, not just on cuts, but on almost any policy where finance is involved, and that is most.

John,
‘……..have not understood the numbers…..’ I’m sure that you’re aware that this statement has not filled me with any more confidence even from the low level which I currently feel with government ministers.
I can’t believe that they don’t understand the real picture…otherwise God help us!
I still stick with my opinion of them which I have previously opined on this blog – stealth inflation, ZIRP, probably more QE, more taxes, more PC nonsense, and anaemic growth….very disappointing.

I’m starting to view the governments growth and borrowing figures in much the same light as BoE inflation reports – things may be bad now due to circumstances outside of our control (e.g. the weather!) but 2 years down the road everything will be in tip top shape.

No one believes it any more.

With higher taxes, higher spending, and higher inflation I really do wonder whether we’ll see sustained above trend growth that the government is relying on. If we don’t then the problems will start to compound each other as we’re starting from a weak position in relation to income vs expenditure (due to expenditure being obscenely high).

I think it is tale of three squeezes. There is another group who have set themselves appart from the rest of us. Whose remuneration packages have no relation to performance, that of our Director class. In the last decade while the rest of our salaries have stagnated theirs have risen by 400% , and though there was a slight pause in the last couple of years they have got back to their bad old ways of increasing their remuneration packages above and beyond the returns they generate for shareholders, and completley at odds to the deal they foist on the rest of us.

Here in Saudi the expats have a choice of two schools. They pay slightly less for the privilege than they do in UK. If you don’t like one of them, you move to the other. they do the exams which they choose – IGCSE at the moment. They have their own organisations to provide advice, inspection and general supervision.
It works brilliantly.
Notice what is missing?
A civil service of millions of useless people.
And that is why there is no tax and people can afford to choose their independent school.

The two squeezes are connected. The Government and the Bank are conjuring up a partial solution to the deficit by keeping the interest rate on public borrowing low and allowing sterling to depreciate, i.e. giving us all more inflation. You say the public and media are concentrating on the public sector squeeze – yes, but to no avail as expenditure totals are still rising. Policy-makers should rebut or ignore the public sector’s bleating because their own payoff will come at the hands of the silent majority via the ballot box.

I predict even more government spending as Cameron capitulates to further opposition to the reduction in the rate of public spending increases. I am afraid this government is looking very incompetent. Nearly a year in office and still not understanding what they are doing. Spending £110million a day on debt interest rising to £160million is no measure of success – perhaps that’s why the government never seems to mention it despite the fact it is a devastating riposte to deficit deniers.

If those living largely on savings are 60+ will they also be left out of the state pension rise to be announced? Is it to be an enhanced inflation proofed flat rate which will be available to all newly arrived dependants, but not to the original natives of these Isles who are now retired? How will that play electorally? People in their sixties are probably more aware of the dangers of debt and inflation, and might have been kept on board. Why alienate them through this invidious discrimination, if that is what is planned?

I think and hope the government will modify its original statement, and everyone (including existing pensioners) will get the benefit, otherwise they risk being put in a poltical wilderness for many years by those pensioners who stand to lose out, which will of course be all those who are retired or nearing retirement, which accounts for many millions of votes.

“an extra £485 billion overdraft to tide it over the next five years, and to live with an increase of just £93 billion a year by Year 5 for current spending.”

By year 5, Labour will be back in power, I am sorry to say, and the consequences of that are unimaginable. Presumably parliment will have been virtually nutered by the EU and so it probably won’t matter who is doing the actual talking.

A question. The UK owes over £1,000,000,000,000. I have no idea to whom this is owed. They must be incredibly wealthy. To pay this back (without the additional borrowing that goes on day after day) will take 100 years at £10 billion each year, which is the most I assume we could afford. There is no suggestion in any of the articles that I have seen that we are paying the money back. All that is mentioned is the fact that the interest alone is more than we spend on the MOD, the FCO and DFID.
No doubt much of the debt is not hard cash, though I assume that we are spending hard cash on running the government, and quantitive easing, which seems to me to be counterfeiting, may take up a large proportion of the amount. Perhaps some of it is just promises to pay to banks, Ireland and other people should they run out of money.
This must seem a very simple question from a very simple man but I have always had to pay back debts (mortgage, etc) within a set period of time plus pay the interest on the debts. How on Earth do we , and all the other debtor nations, pay the money back? Please do not spend too much time on the answer, as I assume the Treasury knows the answer (?) and I do not need to know, as I do think that my pension will cover it.

Martin

Reply: the money is owed to many of us through our pension and insurance investments, and to many foreign investors. The government hopes it will be able to roll the loans over when they mature.

I suspect there is a reason why the Coalition is keeping quiet about the truth, that Government spending is actually increasing rather than there being real cuts to the public sector. The reason is, because they want to convince those who work in the private sector that cuts are taking place in order to stop any angry response from these workers. This sort of propaganda helps in other ways as well. Markets and potential investors like to see the direction of travel by Government is towards making a smaller state.

Until the Coalition is brave enough to make deep cuts, the public sector will continue to grow. Councils will continue to cut the wrong projects to protect their own highly paid jobs and in some cases because of political ideology. Workers in the public sector will continue to be convinced by the Unions that they are being unfairly targeted.

The private sector has made huge sacrifices during this financial crisis, taking pay cuts, cutting their hours and many more things to keep their jobs. It is high time the public sector took some of the pain as well. Savers have suffered, under low interest rates, which should have increased long ago, in order for those who created toxic debt to stay afloat. It is a very unfair picture all round.

Unless this Coalition bites the bullet and makes proper cuts, tax will continue to drift upwards, stifling any possible growth. When interest rates finally do go up to any extent forced by inflation to do so, there will be an even bigger squeeze as people spend even less. Living standards therefore will continue to fall.

Britain could have all the ingredients happening at the moment to eventually go into a debt spiral. The only way, I believe, Britain has any chance of recovery is sharp cuts to Government spending across all the services, protecting the frontline jobs as much as possible, and lowering tax especially for high earners to try to increase investment.

John – you asked yesterday ‘What do Conservatives want of the Coalition?’
I can safely say on behalf of you and your contributors definitely not what appears below from today’s papers!
What utter madness in the face of all the warnings here and elsewhere. The Government should hang its head in shame if this information is even close to the mark!

“Ministers expect between 600 and 1,200 management and administration posts will go in the shake-up but up to 60 per cent of those made redundant could find immediate work on the commissioning boards of the new GP consortia which will replace primary care trusts.

Junior health minister Earl Howe told the House of Lords that anyone rehired by the NHS within six months of taking redundancy would forfeit all or part of their payment.

However, Tory peer Baroness Gardner said that in previous NHS reorganisations “large numbers of people claimed redundancy payments then got very favourable jobs afterwards” and the six-month window was “probably not enough”.

The Government has set aside £1billion to fund redundancy but experts predict the figure could be double or treble that.

After a good night’s sleep I want to add this:
Why don’t ministers get a grip? It is not easy taming the Civil Service monster, but the country will never recover until the Civil Service is reduced to, say 1,000,000 people from 5,000,000. And, as you so often say, natural wastage will do this.

A file 2011budget_complete.pdf may be down loaded from the HM treasury web site. One thing I wanted to do was convert all the OBR forecasts from nominal cash amounts to real money in 2010/11 prices, i.e after stripping out the forecast inflation. The other was to test what would happen if GDP growth did not exceed the 30 year average of 2.1% per annum in any single year – not an optimistic scenario but very far from being the worst case.

To do these sort of simple macro-economic calculations you need
(1) Selected data from annex tables C2, C3, C4, C6 and C7
(2) A spreadsheet
(3) Reasonable mathematical ability (nothing exceptional)
(4) An understanding of what inflation is and how to correct for it.
You do NOT need to be a qualified economist to do the maths.

The outcome of the capped GDP growth rate is that by 2014/15 tax receipts will be £15 billion less than forecast by the Office for Budget Irresponsibility, or £13 billion in 2010/11 prices. Additional public spending cuts (or reduced increases if you like to look at it that way) of that amount would be necessary, otherwise the private sector would be hit still harder.

Interesting story in The Observer and what common sense tells you would happen. Most people live close to the edge and this proves this. All the people in support of massive cuts should explain how the people who are affected going to live. How many of these supporters will be personally hit by their own proposed cuts and if you are, do you still support them?
The Office for Budget Responsibility has raised its prediction of total household debt in 2015 by a staggering £303bn since late last year, in the belief that families and individuals will respond to straitened times by extra borrowing. Average household debt based on the OBR figures is forecast to rise to £77,309 by 2015, rather than the £66,291 under previous projection.
At last year’s budget the official forecast from Osborne was that household debt – which includes mortgages and credit card debt – would be £1,823bn. But in a recent adjustment not highlighted in last month’s budget, the OBR has raised the figure to £2,126bn.

About John Redwood

John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.